Thursday, July 30, 2009

Last Bears Giving Up?

David Rosenberg, the former chief economist of Merrill Lynch, now at Gluskin Sheff, has a following take in the early missive today:

But there is no doubt that after the sharpest downturn in housing, production and employment since the 1930s, that the laws of gravity themselves prevent the economy from any further deterioration. Nothing is going to zero, and there is always the chance that housing sales edge back up towards their demographic levels, auto sales recover to their replacement demand levels (plus GM getting back into the leasing game), and inventories get rebuilt in line with spending levels. The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.

The data have been mixed overall, but certainly have been beating expectations for the most part. The question really is, as was the case in Japan, whether there is a fundamental change in the trend or whether we are seeing noise around a secular downtrend. In any event, the recovery we are seeing is the result by and large of a myriad of government patchwork, and while it may well be the case that some areas are stabilizing (industrial output, housing) or even improving (export-related activity — helped in part by the global effects of China’s latest bubble), so long as credit continues to contract, any recovery is going to be fraught with deflation pressure and double-dip recession risks along the way. While most pundits are bullish on the economic outlook, and it does indeed look like 3Q GDP is going to print positive, there is still very little visibility as far as 2010 is concerned.

Although he is, most likely, not giving up his bearish stance yet, the description of the state of affairs in the first paragraph strikes the eye.